It is now two years since the United Progressive Alliance (UPA) government was voted back to office. That is good news; the bad news is that there are three more to go before the next elections.
The performance of this government has to be judged on three aspects: one is economic liberalization, the other is governance, and the third is inclusive growth.
Ever since the Prime Minister was anointed—somewhat inaccurately—as the father of India’s economic reforms of 1991, the nation has come to expect a government under his leadership to pursue reforms doggedly. The Prime Minister has done nothing of that sort.
Also Read | V. Anantha Nageswaran’s previous columns
Prashant Bhushan presented him with an opportunity to rally the nation, to lift its spirits and to cement his place in history as the architect of economic reforms. The lawyer, flanked by writer and activist Arundhati Roy, made an astounding remark in April that India’s economic reforms had been the key factor behind the rise in corruption.
It was a chance for the Prime Minister to take to the airwaves, spell out the national, social and moral case for economic liberalization, pledge to do more, and seize the initiative from those who were aiming to eliminate constitutional corruption through extra-constitutional methods. He did not do so. It is an immense tragedy for the nation that Bhushan’s remarks went uncontested and remains the last word on the contribution of economic reforms to India.
Broadly, governance is about safeguarding the nation’s internal and external security and about delivering economic prosperity. On the security aspect, the preparation of the “most wanted” list of terrorists has conveyed much more than what your humble columnist could ever have hoped to do in this column.
On economic prosperity or growth, one of the biggest follies of this government lies in compounding the grievous error it made in its first innings—passing a fiscal stimulus as large as the one that the US had put in place after its economic crisis. The size of the stimulus was unconscionably large, considering how little India was hurt by the crisis. Even more inexplicable was the failure to withdraw the stimulus long after the moment of crisis had passed.
The effect of an unprecedented voluntary budget restraint by an Indian government would be significant in lowering risk premiums on Indian sovereign and corporate debt, would reduce the cost of capital for all, and consequently lift the morale of the nation. That belongs to the Indian fantasy land. In reality, fiscal spending and inflation are caught in a vicious loop and the government is unwilling to rein in the former for fear of hurting growth.
Nonetheless, lower growth will be the consequence of this myopic approach to the economy, along with the excess baggage of higher inflation. Rising bank loan defaults is the “icing on the cake”. Having failed to lift the nation’s potential growth rate, this government is going to preside over the descent into sub-7% economic growth in its remaining years in the office.
On inclusive growth, the National Advisory Council (NAC) has stolen the government’s thunder with its penchant for enshrining the legal rights of India’s poor to a quality life. But a World Bank report (Social Protection for a Changing India) published recently reminds us of the follies of the NAC’s ideologically rich but pragmatically deficient policy prescriptions. The report says, specifically concerning the right to food, that the Indian public distribution system had “so clearly demonstrated its inability to provide adequate and decent quality grains for so long and in so many places that ruling out the option for households to receive cash is likely to leave many poor households with a stronger legal right, but no better a real world situation”.
Despite encouraging evidence (pl. refer to pages 11-14 of the above report), some members of the NAC have been rubbishing the idea of cash transfers/food coupons for reasons best known to themselves. The contribution of the NAC to the “inclusive growth” agenda has been to ensure that patronage and protection rather than promotion of livelihood and employment opportunities for the poor remain its enduring features.
On exclusive growth, this government has something to show. Michael Walton’s 2010 paper (“Inequality, rents and the long-run transformation of India”) shows that the share of total billionaire wealth in the country belonging to those who were enriched by “rent-thick” activities and sectors (natural resources, government contracts) is over 80%. Those who were engaged in other sectors (for example, information technology) have seen their share of billionaire wealth drop from 60% in the early years of the new millennium to below 20% now.
During the UPA’s first innings, the net worth of Indian billionaires as a percentage of gross domestic product had gone from 3.35% in 2004 to 23.05% in 2008. The global crisis pushed it down to 6.88%; but the government’s fiscal generosity and corruption pushed it back to 14.18% in 2010.
The UPA has put India in a hole, and it hasn’t stopped digging.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org